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There is mounting empirical evidence to suggest that the law of one price is violated in retail financial markets: there is significant price dispersion even when products are homogeneous. Also, despite the large number of firms in the market, prices remain above marginal cost and may even rise as more firms enter. In a non-cooperative oligopoly pricing(More)
We analyze the problem of an investor who needs to unwind a portfolio in the face of recurring and uncertain liquidity needs, with a model that accounts for both permanent and temporary price impact of trading. We first show that a risk-neutral investor who myopically deleverages his position to meet an immediate need for cash always prefers to sell more(More)
We describe how episodic illiquidity arises from a breakdown in cooperation between market participants. We first solve a one-period trading game in continuous-time, using an asset pricing equation that accounts for the price impact of trading. Then, in a multi-period framework, we describe an equilibrium in which traders cooperate most of the time through(More)
We develop a dynamic model to study the interaction between obfus-cation and investor sophistication in retail financial markets. Taking into account different learning mechanisms within the investor population , we characterize the optimal timing of obfuscation for a profit-maximizing monopolist. We show that educational initiatives that are directed to(More)
  • YiLi Chien, Harold Cole, +11 authors Monika Piazzesi
  • 2010
Our paper examines whether intermittent portfolio re-balancing on the part of some stock market investors can help to explain the counter-cyclical volatility of aggregate risk compensation in financial markets. To answer this question, we set up an incomplete markets model in which CRRA-utility investors are subject to aggregate and idiosyncratic shocks and(More)
A risk-averse manager's overconfidence makes him less conservative. As a result, it is cheaper for firms to motivate him to pursue valuable risky projects. When compensation endogenously adjusts to reflect outside opportunities, moderate levels of overconfidence lead firms to offer the manager flatter compensation contracts that make him better off.(More)
Given the importance of sound advice in retail financial markets and the fact that financial institutions outsource their advice services, how should consumer protection law be set to maximize social welfare? We address this question by posing a theoretical model of retail markets in which a firm and a broker face a bilateral hidden action problem when they(More)
How do differences of opinion affect asset prices? Do investors earn a risk premium when disagreement arises in the market? Despite their fundamental importance, these questions are among the most controversial issues in finance. In this paper, we use a novel data set that allows us to directly measure the level of disagreement among Wall Street mortgage(More)